Trusts

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TRUSTS DEFINED

Back 1

A trust is a fiduciary relationship in which the trustee agrees to manage, invest, safeguard, and administer trust assets and income for the benefit of designated beneficiaries.

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TRUSTS AND TITLE HOLDERS

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The trustee holds legal title. The beneficiaries hold equitable title.

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TYPES OF TRUSTS

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Trusts are catagorized according to their method of creation.

1. Express trusts
2. Resulting trusts
3. Constructive trusts

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EXPRESS TRUSTS

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Express trusts fall into two categories: private and charitable.

An express trusts arises when legal title to property is vested in one who is subject to equitable duties to deal with it on behalf of another.

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RESULTING TRUSTS

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Resulting trusts arise upon the failure of an express trust or when an express trust purposes are accomplished and the corpus is not exhausted. The arise from the presumed intention of the owner of the property.

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CONSTRUCTIVE TRUSTS

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Constructive trusts arise as an equitable remedy for fraud or unjust enrichment.

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PRIVATE TRUSTS

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A private trust is created for the benefit of certain ascertainable persons.

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CHARITABLE TRUSTS

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A charitable trust is created for the benefit of an indefinite class of persons or the public in general.

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EXPRESS TRUST CREATION

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An express trust is created when the owner of the property expresses an enforceable intent to place the property in trust.

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INTER VIVOS TRUST - TRANSFER

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An express inter vivos trust is created by transfer when the owner of property transfers the property during her lifetime to the trustee for the benefit of a beneficiary.

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INTER VIVOS TRUST - DECLARATION

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An express inter vivos trust is created by declaration when the owner of property states that he holds the property as trustee in trust.

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TESTAMENTARY TRUST

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A testamentary trust is created by will executed with the formalities required under the Statute of Wills and does not take effect until the settlor dies.

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CONTRACT TO CREATE TRUST

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A contract to create a trust is enforceable only if it is supported by consideration.

A contract to create a trust does not presently create a trust.

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TRUSTS CREATED BY POWER OF APPOINTMENT

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A trust may be created by selecting a person who will be given the authority to dispose of certain property under a will.

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TESTAMENTARY TRUST REQUIREMENTS

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A will may validly devise property to the trustee of a trust to be established at the testator's death if the following requirements are met:

1. The trust must be identified in the will; and

2. The terms of the trust are set forth in a written instrument other than the will.

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ARE TRUSTS REVOCABLE?

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In Arizona all trusts are generally irrevocable.

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WHEN MAY A TRUST BE TERMINATED OR MODIFIED?

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A trust may be terminated or modified if:

1. the right to do so was expressly reserved, and

2. the termination or modification complies with all the requirements in the trust instrument regarding the form it must take.

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REQUIREMENTS FOR CREATION OF A TRUST

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A valid trust is created when the creator:
1. with capacity to convey
2. delivers legal title of
3. certain and identifiable assets to the trustee
4. for the benefit of ascertainable beneficiaries, with
4. intent to create a trust, for a
5. valid purpose

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INTENT TO CREATE A PRESENT TRUST

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The settlor must express an intent to create a trust presently and not at some future time.

If intent is conditional on a future event or if the trust property or beneficiaries are to be determined in the future no trust is created.

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TRUSTEE DUTIES

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– a trustee has a duty to invest and manage trust assets as would a prudent investor, by considering the purposes, terms distribution requirements and other circumstances of the trust. The trustee must exercise reasonable care, skill and caution and always act in good faith.

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AUTOMATIC TRUST TERMINATION

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A trust will terminate automatically at the expiration of the trust term specified in the instrument or when all of the purposes of the trust have been accomplished.

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DISCRETIONARY TRUSTS

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A discretionary trust allows the trustee to either pay the principal to the beneficiary or to accumulate it. The beneficiary cannot interfere with the exercise of discretion unless the trustee abuses its power. Thus the beneficiary does not have any right to the principal until the trustee exercises it discretion to distribute.

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SPENDTHRIFT CLAUSE

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A trust provision that prohibits the beneficiary from voluntarily or involuntarily transferring her interest in the trust is called a spendthrift clause. These clauses protect the beneficiary from claims of creditors and are valid in Arizona.

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SPENDTHRIFT FOR SETTLOR

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A spendthrift trust may not be created for one’s own benefit to avoid the claims of creditors. Creditors will be able to reach the interest despite a spendthrift clause.

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SUPPORT TRUSTS

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A support trust is one where the trustee is required to pay or apply only so much of the income or principal as is necessary for the support of the beneficiary.

Support trusts cannot be reached by creditors and are not assignable.

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"PAY ALL INCOME FOR SUPPORT"

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A trust to "pay all income for support" is not a support trust. The beneficiary is not limited to amounts necessary for support.

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INVOLUNTARY TRANSFER - RIGHTS OF CREDITORS

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The general rule is that any property that a person can transfer can be subjected to the claims of his judgment creditors.

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HONORARY TRUSTS

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An honorary trust is created when all trust elements are satisfied except there is no beneficiary who can enforce the trust. These trusts are generally valid but may be subject to the rule against perpetuities so that the trustee may not perform the trust for longer than 21 years, regardless of whether the trust contemplates a longer duration.

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POUR-OVER WILL

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A pour-over will is a will of a person who has executed a trust in which all property is to be distributed or managed upon the death, leaving all property to the trust.

A pour over will guarantees that any assets which were not included in the trust become assets of the trust at death.

In Arizona, unless the will provides otherwise, property that is devised to a trust becomes part of that trust rather than creating a new testamentary trust.

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EQUITABLE DEVIATION

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In Arizona, a court may, exercising its equitable power, authorize equitable deviation from administrative terms of the trust when necessary. This doctrine applies when a trust purpose can still be carried out. A court may allow a deviation to allow for distribution of trust income if it is in excess of what it originally was.

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CY PRES

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When a gift is made by will or trust (usually for charitable or educational purposes), and the named recipient of the gift does not exist, has dissolved or no longer conducts the activity for which the gift is made, then the estate or trustee must make the gift to an organization which comes closest to fulfilling the purpose of the gift.

Arizona courts have not adopted cy pres as part of common law. Look to equitable deviation.

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CHARITABLE TRUSTS

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A charitable trust must:

1. have a charitable purpose, and

2. be in favor of a reasonably large number of unidentified beneficiaries (need not be ascertainable)

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WHAT HAPPENS TO A TRUST WHEN THE CHARITABLE PURPOSE NO LONGER EXISTS?

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When specific charitable purposes can no longer be accomplished the trust may be reformed under the doctrine of cy pres.

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CHARITABLE TRUSTS AND PARTICULAR CLASSES

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The purpose of the trust may benefit a particular class, but the class may not be so narrowly defined that it designates only a few beneficiaries.

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TRUSTEE - PRUDENT INVESTOR RULE

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Except as otherwise provided by the terms of the trust, a trustee must manage property as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust and by pursuing an overall investment strategy reasonably suited to the trust. A trustee must adhere to a standard of reasonable care, skill, and caution in making investment decisions.

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TRUSTEES WITH SPECIAL SKILLS

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A trustee who possess special skill or who is named trustee on the bases of representations of possessing special skill is held to a higher standard.

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TRUSTEE FIDUCIARY DUTY

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A trustee must:
1. keep the trust productive

2. balance return with potential risk

3. diversify investments

4. not commingle funds

5. delegate investment decisions as permitted by statute.

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WHO MAY ENFORCE THE DUTIES OF THE TRUSTEE? HOW?

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Only the beneficiaries may enforce the duties of a trustee. Whenever a trustee breaches a fiduciary duty the beneficiary has a choice of options:
1. ratify the transaction and waive the breach
2. sue for resulting loss (surcharge)
3. in self-dealing cases he can trace and recover the property of the trust.

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LIABILITY OF SUCCESSOR TRUSTEE FOR BREACHES BY PREDECESSOR

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A successor trustee cannot be sued for a breach by a predecessor without an element of fault.

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DOMESTICATED OR PET ANIMAL TRUST

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An Arizona, by statute, a trust for the care of a domesticated or pet animal is valid for the lifetime of the animal. If the trust does not name a person who can enforce the trust the court will nominate a person.

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TRUSTEE CONTRACT LIABILITY TO THIRD PARTIES

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in general third parties sue on contracts entered into by a trustee by proceeding against the trustee in his representative capacity. The trustee may be sued personally if he failed to reveal his representative capacity and identify the trust.

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TORT LIABILITY TO THIRD PARTIES

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a third party may sue the trust estate for torts committed by the trustee or his agent. The trustee is not personally liable unless he was personally at fault. In this case, the third party may sue either the trust or the trustee. If he sues the trust, the beneficiaries may surcharge the trustee.

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TRUSTS AND STATUTE OF FRAUDS

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The Arizona Statute of Frauds does not contain any direct provision relationg to the creation of trusts.

Early case law held that express oral trusts of land were within the Statute.

The Statute of Frauds does not apply to resulting or constructive trusts.

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REVOCABLE INTER VIVOS TRUST

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A Revocable Inter Vivos is used primarily to avoid probate, reduce estate taxes, preserve your privacy, and manage your financial affairs.

A Revocable Inter Vivos is a trust established while you are living. It is revocable, so you are able to make changes whenever you want, as well as reclaim the property transferred into it. It describe how your property should be managed while you are alive, and how it should be distributed upon your death.

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TRUST ACCOUNTING

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The trustee shall keep the beneficiaries of the trust reasonably informed of the trust and its administration.

Upon reasonable request, the trustee shall provide the beneficiary with a copy of the terms of the trust, with relevant information about the assets of the trust and the particulars relating to the administration.

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INCOME AND CORPUS

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The income beneficiaries get the net income while the remaindermen are entitled to trust corpus at the termination of the trust. Thus, items of receipts and expenditures must be allocated to the correct account: income or corpus.

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TRUST INCOME, PRINCIPAL AND EXPENSES

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Interest, rents, dividends on stock, paid in cash are income. Proceeds from the sale of trusts, stock splits and dividends paid in stock are principal.

Ordinary expenses incurred in the production of income are charged to the income account. Extraordinary items, capital improvements and income taxes incurred on the sale of trust property are charged to the principal. The trustees fee is charged half and half.

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TRUSTEE POWERS TO ADJUST

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Under the Revised Uniform Principal and Income Act a trustee has the power to adjust the normal classifications of income and principal if it is necessary to comply with the trustee's duty of impartiality.

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TRUSTS - THE RES REQUIREMENT

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The corpus, the principal, the subject matter of the trust must be a specific interest in property.

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TRUST PURPOSE

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There are no Arizona statutory limitations on purposes for which a trust may be created, but a trust will fail if its enforcment involves the commission of a crime or tort.